The CII AF1 April 2021 Exam in Review
The CII has released their papers from the exam sittings that happened in April. In this article, we look at what was tested this time round in AF1: the Personal Tax and Trust Planning paper.
You can find the exam guide here.
Question 1 of Section A introduced us to Ron a widower aged 76, his son Arthur and his long-term partner Olga and their two children.
The exam started with a question on Arthur in his capacity as executor of Ron’s estate. The first question, which is often a calculation, asked candidates to calculate and explain any transferable nil rate bands that would be available to set against Ron’s estate. This was for nine marks and meant candidates had to pick through the case study and hopefully notice that Ron’s late wife Molly had set up a discretionary trust in her will. This used up her NRB but would have had a tapered RNRB, which could have been used against Ron’s estate.
Part (ii) asked for an explanation of why and how the gift to Arthur of £500,000 would be taxed following Ron’s death. This was for 5 marks and was testing taper relief and the fact that Arthur would have been liable to pay the tax.
Part (iii) was another calculation – this time using the answers from parts (i) and (ii). Candidates were asked to calculate the IHT liability following Ron’s death. This was for seven marks, and candidates would have needed to have included the outstanding loan from the loan trust and remember to deduct the EIS.
Finally, part (iv), candidates, for six marks, were asked to list Arthur’s duties as executor of his father’s estate. This is a very well tested area, and most candidates should have scored most of the marks available.
Question (b) continued with the IHT theme with a question on the protection arrangements which could have been put in place to mitigate the IHT following Ron’s gift to Arthur in 2018. This was for 8 marks and potentially an area not tested in some time which may have left some candidates not giving a full answer to get all the marks on offer.
Question (c) was in three parts. Firstly, candidates had to describe five advantages and five disadvantages of Ron’s establishing a discounted gift trust using a discretionary trust. In part (ii), candidates were asked to identify the factors which should have been considered prior to Ron’s investing in the DGT. This was for eight marks and finally in part (iii), for seven marks, an explanation was required of how the Loan Trust will be dealt with following Ron’s death.
As we have said before, factors questions are very common now within the written papers; so candidates must ensure they are relating their answers back to the information given in the case study.
Onto question (d) and an easier question amongst the technical knowledge required so far; candidates were asked to explain the tax treatment of income withdrawals Arthur could take from each of the drawdown plans he had inherited from his father. This was for just two marks and for another two marks state how the tax treatment of the income withdrawn by Arthur would differ if he had inherited his mother’s pension directly on her death. We hope this did not cause candidates any problems at all.
Finally, question (e) and firstly, a question on the laws of intestacy and in part (ii), the conditions which must be met for Arthur’s new will to be valid, and finally the impact on Arthur’s new will if he decides to marry Olga in the future. All of these areas are regularly tested so should have caused no problems to a well-prepared candidate.
Section B comprises two case studies.
Question 2 introduced us to Ricardo domiciled in Portugal and his wife Jolene, a UK domicile.
Firstly, candidates were faced with another calculation for 14 marks – this time it was Jolene’s liability to CGT which needed calculating. It was straightforward except for the top-sliced gain, of which some candidates may not have realised the relevance. The questions continued with CGT: firstly, candidates were required to explain when Jolene must report and pay any CGT on assets – for a total of 5 marks – and also explain how the loss on the sale of Ricardo’s shares could have been used to reduce Jolene’s CGT – for 3 marks.
The topic changed from CGT to excluded property trusts. Firstly, candidates had to describe the main features of this type of trust and then explain the benefits to Ricardo of his placing the offshore bond into an EPT. The whole question was for 10 marks and may have caused issues for some candidates, as it is not a subject that has been overly tested in the past.
Question (e) asked what would happen to Ricardo’s domicile status if they decided to permanently retire to Portugal. Eight marks were available and again, some would have found it a challenge to give an answer that would have received all of these marks.
Finally Question 3. This concerned Emiliano and Martina, both in their sixties, with one daughter aged 26.
Firstly, another calculation – this time a very straightforward income tax calculation for eight marks, which would have been a welcome relief from some of the more technical aspects of the syllabus tested in the previous question.
Next was an area not often tested: the conditions which must be met for an MIP to be classed as a qualifying policy – this was for six marks and may have thrown some candidates who may not have studied the qualifying rules as part of their revision plan.
Candidates were then required to demonstrate their knowledge of the income tax relief on VCTs and EISs for seven marks and for another four marks, explain how any gains on Martina’s EIS would be taxed in 2025/2026. Some finer details of the rules were being tested here which may not have been picked up by some.
The final two questions tested State pension entitlement for eight marks and for seven marks, how the couple could benefit from the Marriage Allowance. The most marks would have been scored by those candidates who related their answers to the detail given in the case study.
Overall, this was another well balanced AF1 paper; the familiar topics were tested, including the main tax calculations. Future candidates should ensure they always include domicile and residence in their study plans and ensure they practise well the main calculations to ensure they have the best chance of picking up all the available marks.
Comparison with the February 2021 Exam Paper
Let’s look at what was tested in February 2021’s paper. This question paper can be found here.
The topics covered were:
- IHT, IIP trusts, domicile and business relief
- Residence nil rate band
- Chargeable gains on investment bonds
- Business Asset Disposal Relief and CGT including a calculation
- Penalties that HMRC impose if CGT is not paid on time
- Gains on sale of house
- Income Tax calculation
- Factors to consider when deciding to opt back into child benefit
- Taxation of an investment bond and the effects of gift aid and pension contributions
- Tax treatment of interest and dividends from equity and non-equity Unit Trusts
- Benefits of a Lasting Power of Attorney
- Non-residence rules
As you can see, there is overlap with each session, and you can clearly see that in each paper certain parts of the syllabus are always tested.
Candidates should study, in full, past exam guides to ensure they pick up on different themes.
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